TaxTMI 
TaxTMI 
2000 (1) TMI 145
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....l/90 and 3851/Del/90 in assessee's own case for assessment year 1984-85. Respectfully following the aforesaid earlier order for assessment year 1984-85 of the Tribunal as well as the order of the Tribunal in assessee's case for assessment year 1982-83 and assessment year 1983-84 in ITA Nos. 2670/Del/87 and 2869/Del/87, we decide this issue in favour of the assessee and against the Revenue. Hence, Ground No. 1 of the Revenue's appeal is rejected. 4. Ground No. 2 raised by the Revenue is reproduced below:-- "On the facts and in the circumstances of the case, the CIT (A) has erred in holding that the medical expenses of Rs. 2,479 will not constitute perquisite for the purpose of disallowance under section 40(c) of the I.T. Act." 4.1 The Ld. representatives of both sides admitted that this issue is also covered in favour of the assessee by an order of the Tribunal in assessee's case for assessment year 1984-85. The Tribunal in assessment year 1984-85 decided the said issue in favour of the assessee by following the judgment of theHon'ble Apex Courtin CIT v. Mafatlal Gangabhai & Co. (P.) Ltd. [1996] 219 ITR 644/85 Taxman 381 and the judgment of the Jurisdictional High Court in ....
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.... at Rs. 63,26,854 including expenses incurred for foreign travel. The assessee filed Working Sheet under Rule 6D vide Annexure 'C' of Tax Audit Report, according to which disallowance has been worked out at Rs. 3,15,608. The Assessing Officer observed that position regarding deficiency in respect of supporting documents prevailed in the year under consideration is the same as in the previous year. He, therefore, disallowed a sum of Rs. one lakh on account of non-verification of claim and further disallowance of Rs. one lakh was made for non-verification of working of Rule 6D. Thus, a further disallowance of Rs. 2 lakhs in addition to the disallowance of Rs. 3,15,608 worked out by the assessee was made. 5.4 The CIT (A) vide para 6 on pages 19 to 21 of the order deleted the disallowance of Rs. one lakh made on account of non-verification of claim but confirmed the disallowance of Rs. one lakh made on account of lack of complete details for verification of the quantum of disallowance under Rule 6D. 5.5 The Tribunal in assessee's case for assessment year 1984-85 vide para 10 at page 16 of its order, deleted the disallowance of Rs. one lakh made under Rule 6D, which was sustained ....
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....as been accepted by the Revenue and such system was disturbed by them from assessment year 1985-86. Similar addition made by the Revenue in assessment year Tribunal in its order dated28th September, 1998vide para 88 of their order has given the following findings:-- "We have considered the rival submissions, perused the record and looked into the relevant documents to which our attention was drawn. We have also gone through the case laws as cited by the counsel for the assessee and are of the considered view that since duty has not been paid at all, there was no point in valuing closing stock of uncleared goods lying in the factory by including excise duty where excise duty is a future event which takes place on removal of goods from the factory when cleared. Since system of valuation" of stock without including excise duty payable thereon is being consistently followed by the assessee and being accepted by the revenue, we see no point in making such addition. We also find that this plea of the assessee's representative that if Assessing Officer is to change the method of valuation of closing stock the opening stock for the year under consideration needs to be valued on the same....
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....; 12,234 (iii) Electrical fittings with accessories 19,938 (iv) Construction of wall around coal shed 19,217 (v) Construction of road near shipping platform 60,538 (vi) Charges for electrical jobs for new pan inspection area 10,754 laying of power-cable, earth wire, floor main connections, fixing of various electrical accessories, fixing MS Box, making trenches and refilling the same,laying of conduit pipes etc. (Bill not available) &nbs....
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....he Ld. Sr. D.R. relied upon the reasons mentioned in the order of the CIT (A) as well as the assessment order. 8.5 On a careful consideration of the entire relevant facts and keeping in view the judgment of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd v. CIT [1980] 124 ITR 1/3 Taxman 69, we are of the view that disallowance made in respect of remaining items mentioned above should be deleted. The assessee, therefore, gets a relief of Rs. 71,509 (Rs. 1,42,047 - Rs. 60,538). The balance amount of disallowance is confirmed. 9. Ground No. 3 raised in the assessee's appeal is as follows: That the Learned Commissioner of Income Tax (Appeals) erred, on facts and in law not to allow deduction of a sum of Rs. 1,73,15,903 in terms of Section 43B of the Act in respect of Excise Duty embedded in the value of closing stock as of December 31, 1985. Further the learned Commissioner of Income Tax was erroneously confirmed addition of Rs. 45,22,814 by Income Tax Officer on account of difference in Excise Duty of opening and closing stocks embedded in the stocks." 9.1 The Ld. representatives of both sides contended that this issue is covered in favour of the assessee by t....
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....s in CIT v. Birla Cotton Spg. and Wvg. Mills Ltd [1971] 82 ITR 166 (SC), South Asia Industries (P.) Ltd. v. CIT [1981] 132 ITR 144/6 Taxman 150 (Delhi) andSouth AsiaIndustries (P.) Ltd. v. CIT[1985] 155 ITR 392/[1986] 25 Taxman 171 (Delhi). The Legal Expenses incurred for contesting penalty case relating to Sales Tax cannot be treated as having been incurred in connection with infringement of law. 11.2 The Ld. DR. relied upon the facts and reasons discussed in the order of the CIT (A). 11.3 After considering the submissions made by the Ld. representatives and after going through the above referred decisions, we are of the view that expenditure in question has been incurred or business purposes and is clearly allowable under the Act. The Assessing Officer is directed to allow the same. 12. Ground No. 6 directed against initiation of penalty proceedings under section 271(1)(c) was not pressed by the Ld. counsel. Hence, the same is rejected, as not pressed. 13. As regards Ground No. 7 relating to levy of interest under section 139(8) and Section 215, the Assessing Officer is directed to grant consequential relief. 14. Now we will consider the main Ground Nos. 1a and 1b ....
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.... the order. After considering the entire relevant facts, the CIT(A) observed that the assessee has obtained a technical knowledge, know-how, designs, formulas which have been given to the appellant-company, the benefit of permanent and enduring nature. He further observed that it is essential to take note of the fact that apart from the lumpsum payment, the appellant has to pay royalty @ 2 per cent for the period of 5 years beginning with the commencement of production of radial tyres. The appellant-company has thus obtained the assets in the shape of technical information, drawings, designs, formulas which have been used by the appellant-company for manufacture of radial tyres. The CIT(A) relied upon the judgment of Hon'ble Supreme Court in the case of Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86. He also observed that such technical know-how was obtained for manufacture of radial tyres which was an additional product of the manufacturing unit. The Ld. CIT(A) confirmed the action of the Assessing Officer of treating the said sum of Rs. 16,42,205 as an expenditure of capital nature. The alternative claim of the assessee for grant of depreciation, tripple shift allowanc....
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....ments really amounted to capital expenditure. It was also pointed out on the strength of judgment of Bombay High Court in Kirloskar Pneumatic Co. Ltd. v. CIT [1982] 136 ITR 746/[1981] 7 Taxman 85 that it is not possible to scan a contract in bits and pieces to determine its nature, nor by referring to a particular clause. The predominant intention has to be ascertained by taking an overall view of the Agreement. 14.4 The Ld. counsel also placed reliance on the following two decisions of ITA Tin which such expenditure was allowed as revenue expenditure:-- (1) IAC v. Rollatainers Ltd. [1987] 23 ITD 440 (Delhi) (2) IAC v. Bajaj Tempo Ltd [1996] 218 ITR (AT) 147 (Pune)(SB) 14.5 The Ld. counsel also placed reliance on the decision of the Tribunal in assessee's own case for assessment year 1984-85 in which the Tribunal, on identical facts, has held that payment of technical know-how fees for manufacture of extra large OTR tyres is allowable as revenue expenditure. It was held that the consideration was paid for the betterment of the product in question and the assessee has only enlarged the range of existing product. The Ld. counsel submitted that the only difference between ....
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.... section 37(1). If it is capital expenditure, 1/6th by way of amortization is allowable under section 35AB. 14.10 The Ld. Sr. D.R. strongly supported the order of the CIT(A) as well as the Assessing Officer. He drew our attention towards a recent judgment of the Hon'ble Supreme Court in the case of Jonas Woodhead & Sons (India) Ltd. v. CIT [1997] 224 ITR 342/90 Taxman 483. He submitted that all the earlier cases relied upon by the Ld. counsel have been considered by the Hon'ble Supreme Court in this latest judgment. The facts of this latest judgment indicate that the assessee in that case had obtained a completely new plant with a complete new process and completely new technology for manufacture of the product. In the present case also, the assessee has obtained know-how for manufacture of entirely new product, namely, radial tyres, which was hitherto not being manufactured by the assessee. The assessee had been manufacturing only OTR tyres. The Supreme Court also laid emphasis on whether on expiry of the period of Agreement, the assessee is required to give back the plans and designs which were obtained. In the present case, the assessee is not required to return the plans and....
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....ision of ITAT Special Bench in Bajaj Tempo Ltd's case are also distinguishable. In that case also, the technical data were required to be returned on the expiry of the Agreement. Moreover, the Special Bench sitting inMaharashtrahad to follow the binding judgment of the Hon'ble Bombay High Court in CIT v. Tata Engg. & Locomotive Co. (P.) Ltd. [1980] 123 ITR 538/[1979] 2 Taxman 149 as clearly observed by the Special Bench in Bajaj Tempo Ltd.'s case. The Special Bench while following the binding judgment of Hon'ble Bombay High Court dissented from the judgment of Hon'ble Madras High Court in Fenner Woodroffe & Co.Ltd v. CIT [1976] 102 ITR 665. The Ld. Sr. D.R. submitted that theMadrasjudgment has been approved by the Hon'ble Supreme Court in the latest judgment in Jonas Woodhead & Sons (India) Ltd.'s case. Thus, the judgment of Bombay High Court and the decision of Special Bench following the same stands impliedly overruled. The Ld. Sr. D.R. thus very ably tried to distinguish the facts of the various judgments relied upon by Mr. Vohra. 14.12 The Ld. Sr. D.R. submitted that the decision of the Tribunal in assessee's own case for assessment year 1984-85 is also clearly distinguishab....
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.... the foreign firm, what was set-up by the assessee was a new business and the foreign firm had not only furnished information and the technical know-how but rendered valuable services in the setting-up of the factory itself. In the present case, the know-how obtained for manufacture of radial tyres was not a new business but it was in the same line of existing business. The appellant company did not require any new plant or machinery for manufacture of radial tyres. It only needs a change in the chemical composition. The Tribunal in assessee's own case in assessment year 1984-85 has duly considered the said judgment of the Hon'ble Supreme Court in Jonas Woodhead & Sons (India) Ltd.'s case. The Bombay High Court in the recent case of Kirloskar Tractors Ltd has also considered the said judgment of theHon'ble Apex Court. After considering the said judgment, it has been held that payment for acquiring only the use of know-how is clearly allowable as a revenue expenditure. The term "transfer of technology" used in the Agreement is subject to the various terms and clauses of the said Agreement. The Agreement provides for various restrictive clauses such as confidentiality and secrecy cla....
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....ion beyond its natural meaning, it has been expressly so provided in the relevant statutory provision. The Ld. counsel thus strongly urged that the expenditure should be allowed as revenue expenditure. 15. We have carefully considered the submissions made by the Ld. representatives and have also gone through all the judgments cited by them. We have also carefully gone through all the relevant documents submitted in the compilation to which our attention was drawn during the course of hearing and also the orders of the Ld. Departmental Authorities. We have given our very thoughtful consideration to the submissions made. 15.1 It may be imperative to first examine the ambit and scope of Section 35AB inserted by the Finance Act, 1985 w.e.f 1-4-1986 which has been made applicable from Assessment year 1986-87. The provisions of Section 35AB(1), as it existed in the relevant year, is reproduced hereunder: "35AB.(1) Subject to the provisions of sub-section (2), where the assessee has paid in any previous year any lumpsum consideration for acquiring any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and ....
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....ort his contention that where any of the statutory provision is clear and unambiguous, the literal interpretation has to be applied. He submitted that Section 35AB is a specific provision dealing with allowability of any lumpsum consideration for acquiring any know-how for the use for the purposes of business. The use of word 'any' at these two places in Section 3 5AB(1) clearly shows that it will apply to any lump sum payment made for acquiring any knowhow regardless of the fact whether it is in the nature of capital expenditure or revenue expenditure. He also submitted that such a special provision dealing with allowability of expenditure or know-how will prevail over general provisions contained in Section 37(1). In order to appreciate this contention of the Ld. Sr. D.R. we will also examine the language of few other sections of the Act. Section 35A which deals with allowability of expenditure on acquisition of patent rights or copyrights clearly provides that in respect of any capital expenditure of a capital nature incurred after 28th February, 1966, on the acquisition of patent rights or copyrights used for the purposes of the business, a deduction equal to the appropriate fr....
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....les promotion, running and maintenance of aircrafts and motorcars, payments made to hotels in excess of Rs. 1 lakh shall be subjected to disallowance @ 20 per cent on the aggregate expenditure incurred on these heads of expenditure in excess of Rs. 1 lakh. 15.5 It may also be worthwhile to refer to Sections 40,40A and 43B of the Act which provides that notwithstanding anything to the contrary contained in any other provisions of the Act, certain expenditure which are otherwise allowable under section 37(1) will not be allowed or their allowability will depend on the fulfilment of the conditions prescribed in these prohibitive provisions. It is clear from these provisions that wherever Legislature wanted to restrict the allowability of an expenditure, which is otherwise allowable under section 37(1), a non-obstante clause such as notwithstanding anything contrary contained in any other provisions of this Act" or "notwithstanding anything contained in sub-section (1) of Section 37" have been specifically added in such restrictive and prohibitive Sections. No such non-obstante clause has been used in Section 35AB of the Act. Section 35AB is a enabling provision which provides for g....
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.... contract. 15.8 It may also be pertinent to reproduce hereunder the comments given by the Ld. author Shri Kanga and Palkhivala in their book "The Law and Practice of Income Tax, 8th Edition, Vol. I at page 573:-- "Section 35AB. Expenditure on know-how--This section allows deduction, spread over six years, of a lump sum consideration paid for acquiring know-how for the purposes of business. The section, which is an enabling section and not a disabling one, should be confined to that consideration which would otherwise be disallowable as being on capital account. A payment for acquiring know-how or the use of know-how which is on revenue account is allowable under section 37, and does not attract the application of this section at all." 15.9 Let us also examine the object and intention with which the provisions of Section 35AB were introduced. The extracts from the Budget Speech of Hon'ble Finance Minister for 1985-86 is reproduced hereunder:-- "With a view to provide further encouragement for indigenous scientific research, I propose to provide that lump sum consideration received by scientists for the know-how developed by them would be spread over a period of three yea....
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....Income-tax Act, 1922, read as a whole, is a provision directed towards encouraging industrialisation by permitting an assessee setting up a new industrial undertaking to claim relief from tax to the extent of tax on six per cent, of the capital employed every year. But the Legislature took care to restrict such benefit only to those undertakings which were new ill form and substance, by providing that the undertaking should not be "formed" in any manner provided in clause (i) of section 15C(2). By that clause, the Legislature intended to control any attempt or effort to abuse the benefit intended for new undertakings by changing of label. The intention was not to deny the benefit to genuine new industrial undertakings but to control the mischief which might have otherwise taken place. Adopting a literal construction would result in defeating the very purpose of section 15C. Therefore, it becomes necessary to resort to a construction which is reasonable and purposive to make the provision meaningful. A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be int....
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....ctly or indirectly in the provision of any remuneration or benefit or amenity to an employee. The expenditure on employees is now removed from section 40(c) and incorporated in section 40A(5). The two sections 40(c) and 40A(5) are, however, not mutually exclusive. In section 40(c), the proviso, for example, refers to a case where the director, (or a person who has a substantial interest in the company or a relative of the director or of such person) is also an employee of the company for any period prescribed in the previous year. In that situation, expenditure of the nature referred to in clauses (i), (ii), (iii) and (iv) of the second proviso to clause (a) of section 40A(5) shall not be taken into account for the purpose of calculating the ceiling under section 40(c) of the Act. It has been held that in the case of directors who are also employees, both these sections will be attracted and the higher of the two ceilings has to be applied [CIT v. Indian Engineering and Commercial Corporation (1993) 201 ITR 723 (SC)]. If for the purpose of ceiling on expenditure, both sections 40(c) and 40A(5) are to be applied to employee-directors, there is no reason why for the purpose of decidi....
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....facturing of an entirely new item but the radial tyre was simply an improved variety of tyre, which did not require any new plant and machinery but only needed a change in the chemical composition. The know-how obtained for manufacture of radial tyres was thus meant for improvisation of the existing products. It should be treated as a product of the same line of the existing business carried on by the assessee. 16.2 The Tribunal in the assessee's own case for assessment year 1984-85 had considered the allowability of expenditure of Rs. 55,15,730 being the amount of consideration paid to Goodyear Tyre & Rubber Co. for providing technical know-how, designs and drawings etc. for manufacture of extra large OTR tyres. The Tribunal after considering the two judgments of the Hon'ble Supreme Court in the case of Scientific Engg. House (P.) Ltd. and Jonas Woodhead & Sons (India) Ltd. relied upon by the DR, came to the conclusion that inclusion of the range of extra large OTR tyres constitute the profit making apparatus of the assessee company, expenditure was laid out as part of the process of profit earning. It was an outlay of business in order to carry it on and to earn profit. It fac....
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....ness. 16.3 It may also be relevant here to mention that the activity of manufacture of radial tyres did not require any separate or additional plant and machinery. It only needed a different chemical composition. Such activity was a part of the same business, as there was a common fund, common management, common Plant & Machinery for manufacture of the improved quality of tyres, namely, Radial tyres. 16.4 The Ld. D.R. had laid considerable emphasis to certain clauses of the technical-know-how. Agreement relating to the year under consideration such as the absence of any clause relating to return of the designs, drawings and other documents of technical know-how after termination of the contract etc. to show that such clauses indicate that the assessee had acquired some sort of title of rights of owner-ship over the technical knowhow. 16.5 It may relevant here to refer to the judgment of Hon'ble Bombay High Court in the case of Kirloskar Pneumatic Co. Ltd in which it was observed that it is not possible to scan a contract in bits and pieces to determine its true nature. The Agreement should be considered wholly rather than to put too much emphasis on the various clauses in ....
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....s to the knowledge and information that was necessary to carry on and run the business from day to day, it was not of much significance whether the agreement was entered into at the time of the commencement of a business or in the course of a business which was already being carried on. If the collaboration agreement results in the absolute transfer of technical knowledge to the assessee, the assessee could be said to have acquired an asset or enduring advantage but where the payment is made only for obtaining access to information which does not become its own, the payments cannot be elevated to the status of payments of a capital nature." 16.7 The Hon'bleCalcuttaHigh Court in the case of Avery India Ltd. has held as under:-- "It is by now well-settled that there is no capital element in the payment for acquiring technical collaboration from foreign manufacturers. Such collaborations are entered into merely for the purpose of running the factory as a more technically viable, efficient and profitable unit to yield larger profit. The mere fact that the foreign collaborators have agreed to give exclusive rights to the assessee to manufacture under their trademark does not make ....
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....ough the several judgments of our High Court noticed by us, supports the view that the state-of-the-art technology of modern times can neither be deemed to be permanent, nor of an enduring nature, so as to satisfy the "enduring asset" test." 16.9 The Hon'ble Supreme Court in the case of Alembic Chemicals Works Co. Ltd inter alia, held as under. The relevant extracts from the Head Note are reproduced hereunder:-- "(ii) That there was no material for the Tribunal to hold that the area of improvisation was not a part of the existing business or that the entire gamut of the existing manufacturing operations, for the commercial production of penicillin in the appellant's existing plant had become obsolete or inappropriate in relation to the explanation of the new sub-cultures of the high yielding strains supplied by Meiji. The mere improvement in or updating of the fermentation-process would not necessarily be inconsistent with the relevance and continuing utility of the existing infrastructure, machinery and plant of the appellant. (iii) That the limitations placed in the agreement on the right of the appellant in dealing with the know-how and the conditions as to non-partibil....
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....onditions as to non-transferability to others without the permission of the foreign company, it also contained clauses relating to confidentiality and secrecy of the know-how, it contained prohibition for user of the know-how upon termination of the Agreement. It only provided a licence to the assessee to use such technical know-how for a limited period as provided in the Agreement. The reading of the Agreement as a whole in the light of the aforesaid judgments of the Hon'ble Apex Court, Hon'ble Jurisdictional High Court and other judgments referred above, would make it crystal clear that the expenditure incurred by the assessee by way of lump sum consideration payable for obtaining technical know-how etc. for manufacture of Radial Tyres is clearly allowable as Revenue expenditure. 16.11 On a careful consideration of the entire relevant facts, material and decisions, we are of the considered opinion that the assessee is clearly entitled to deduction of Rs. 16,42,205 as Revenue expenditure under section 37(1) of the Act. The Assessing Officer is, therefore, directed to allow the same. Accordingly Ground No. 1 (a) is allowed. 17. Ground No. 1 (b), containing the alternative pra....
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....preme Court. The controversy involved was whether such expenses were of capital expenditure or revenue expenditure and different decisions on that point had come before us. At the very beginning, we may refer the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. in which the question for consideration before theApex Courtwas whether the payment made by the assessee for purchase of "loom hours" was in the nature of capital expenditure or revenue expenditure. In the said case, the assessee-company was carrying on the business of manufacture of Jute being member of Indian Jute Mills Association. The assessee-company purchased "loom hours" from four other mills for a sum of Rs. 2,03,255 and claimed deduction treating the same as revenue expenditure. In Tribunal assessee succeeded, but Hon'ble High Court concluded that purchase of "loom hours" was in the nature of capital expenditure and as such no deduction could be claimed. But the Hon'ble Apex Court reversing the decision of High Court observed that acquisition of additional "loom hours" did not add to the fixed capital of the assessee as permanent structure from which the income was obtained, remained the sam....
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....apid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeonholing an outlay, such as this, as capital. (ii) In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well-nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear fine of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve-as useful servants; but as masters they tend to be over exacting. (iii) The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it. The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory....
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....h a complete new process and completely new technology for manufacture of the product; (ii) Whether the payment was made for the technical know-how which was for the betterment of the product in question which was already being produced; (iii) Whether the improvisation made is part and parcel of the existing business or a new business was set up with the so-called technical know-how for which payments were made; (iv) Whether the expiry of the period of agreement the assessee is required to give back the plans and designs which were obtained, but the assessee could manufacture the product in the fact that has been set up with the collaboration of foreign firm; (v) Whether the assessee derived benefits coming to capital for which the payment was made." Their Lordships affirmed the view of assessing officer that 25 per cent of the whole of the amount was rightly treated as capital expenditure. Lastly, the Bombay High Court after discussing the decision of Hon'ble Supreme Court in the case of Jonas Woodhead & Sons (India) Ltd. concluded in the case of Kirloskar Tractors Ltd that expenses borne by assessee to obtain know-how for manufacturing tractors and engines as per t....
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....e of the business is related to specific technology and information being developed by any concern, Legislature brought it under different provisions of section 35 which was subsequently added. First of all, section 35A was added to section 35 providing the mode for allowing expenditure on acquisition of patent rights or, copy rights by inserting that section under Finance Act, 1966, w.e.f.1-4-1966. The Legislature had been wise enough in using the words as under:-- "35A. Expenditure on acquisition of patent rights or copy rights--(1) in respect of any expenditure of capital nature incurred after 28th day of February, 1966 on the acquisition of patent rights or copy rights..." 22.7 Legislature again added section 35AB by Finance Act, 1985 w.e.f.1-4-1986providing mode of allowability of expenditure for acquiring any know-how for use of the purpose of his business. 22.8 Afterwards the Legislature allowed allowability of expenditure for obtaining licence to operate telecommunication services by adding section 35ABB by Finance Act, 1997 w.e.f. 1-4-1996 and while doing so, the Legislature in its wisdom has provided as under:-- "35ABB--(1) in respect of any expenditure being ....
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.... previous year by the assessee shall be deducted in computing the profits and gains of the business for that year, and the balance amount shall be deducted in equal instalments for each of the two immediately succeeding previous years. Explanation:-- For the purposes of this section, "know-how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto)." 22.11A perusal of the above shall show that 3 conditions have been laid down for allowing the claim of assessee: (i) assessee should pay any lump sum consideration; (ii) for acquiring any know-how; (iii) such know-how should be for use for the purpose of a business. Let us examine the case as to whether the present case of the assessee is fulfilling the above conditions or not. 22.12 A perusal of copy of agreement dated 1-12-1984 entered in between the assessee and M/s. Goodyear Tyre and Rubber Co., Akron, Ohio (U.S.A.) [hereinafter referred to as Goodyear (U.S.A.)] the copy of which is appearing at ....
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.... we have to see the literal meaning of "acquire" as given above meaning thereby "to get" or "to receive" or "to come into possession". The assessee as evident from the copy of agreement, the copy of which is appearing at pages 1 to 12 of the paper book acquired technical data which shall mean technological developments, plans, specifications, designs, secret manufacturing processes, formulae, bills of material and similar data relating to the development, manufacture, testing, servicing, maintenance and operation as well as improvement of the radial fabric passenger tyres for a payment of US $96,000. The other terms and conditions require that assessee-company shall be paying royalty equal to 2 per cent for a period of 5 years, on the amount to be calculated in terms of that agreement. This agreement was for a period of 8 years. The other terms and conditions requires that during the currency of the agreement period the assessee-company shall maintain technical datas so provided by Good Year (U.S.A.) in secret and will not be divulged to anyone without written consent of the Goodyear (U.S.A.) The assessee-company was under the obligation not to assign any of the right or interest a....
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....tood confirmed. 22.16 It is also the case in between the parties that assessee had paid the part of the consideration for acquiring of know-how in the year under consideration and last requirement of section 35AB is also fulfilled by the assessee. 22.17 The result of the above discussion is that the assessee had fulfilled all the requirement of section 35AB and the transaction in dispute is fully covered by the provisions of section 35AB as the assessee for a lump sum consideration had acquired industrial information for technique which was going to assist in the manufacturing of radial passenger tyre. 22.18 It had been the main contention of the Ld. counsel for the assessee that expenditure in the above referred to two transactions was of revenue nature and allowable under section 37(1) of the Act and not covered under the provisions of section 35AB which is meant for allowing capital expenditure. As pointed above, the Legislature had purposely missed the word "capital expenditure" in section 35AB while the same was used in section 35A which was brought to statute as early as in 1966 and also used that word "capital expenditure" in section 35ABB brought to statute in 1996....
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.... Lordship have also observed that the object of section 37(1) of the Act is not to preclude the consideration of the claim which will not fall under sections 30 to 36 of the Act. In other words, the mere fact with the claim will not fall under any of the sections 30 to 36 will not automatically make the claim unsustainable under section 37(1) of the Act as well. Because in that condition the interpretation shall be to detach from the residuary nature of provision of section 37(1) of the Act. The only inference out of the ratio of their Lordship is that provision of section 37(1) are residuary in nature and in case claim of the assessee is covered under sections 30 to 36 of the Act then the same shall not be entertained in section 37(1) of the Act as the very words used in section 37(1) exclude the deductions referred to under sections 30 to 36. The same was the view in the case of CIT v. Carborundum Universal Ltd. [1977] 110 ITR 621 (Mad.) in which it was laid down expenditure subsequently covered by sections 30 to 43A of the Act cannot be deducted under general principles of section 37(1) of the Act. The other view on the point is that of Andhra Pradesh High Court in the case of N....
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....5AB of the Act and then its allowability or otherwise could have been examined under section 37(1) but as we have concluded that assessee's case is entirely covered under the provisions of section 35AB, provisions of section 37(1) cannot be pressed into action. Apart from it, it may also be noted that provisions of section 35AB are quite simple to be read and there was no necessity for different interpretation as such interpretations are needed when there is any ambiguity in the provisions. If the provisions of any enactment are easily understood by the subjects, courts are not supposed to enter into the arena of interpretation which may be unnecessary. In the case in hand, even assessee was fully alive to the simplicity of the provisions of section 35AB and he had raised alternative plea before authorities below that if provisions of section 35AB are applicable 1/6th of the whole of the amount be allowed in the year under consideration. It shows that assessee was also fully alive that provision of section 35AB were applicable to the transaction in question and thus we conclude that approach of the Assessing Officer to apply the provision of section 3 5AB to the facts of the case i....
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.... of the product for a period of 5 years beginning with the commencement of commercial production of the commercial products. 4. The Assessing Officer was of the view that the assessee had acquired benefit of enduring nature in terms of the said agreement for manufacture of radial tyres. He, therefore, rejected the assessee's claim for deduction of the amount of Rs. 16,42,205 as revenue expenditure, He treated the same as capital expenditure. 5. Alternative plea was also made before the Assessing Officer that in case it was not treated as revenue expenditure, 1/6th of the said amount should be allowed as deduction under section 35AB of the Act. In this regard the Assessing Officer observed that the assessee had paid only Rs. 3,19,768 being the first instalment in the year 1985. He accordingly allowed deduction of 1/6th of the said amount, i.e., Rs. 64,961. 6. Aggrieved, the assessee preferred first appeal before the learned CIT (Appeals), who concurred with the Assessing Officer in the view that the assessee had derived benefit of enduring nature and, therefore, the aforesaid lump sum amount of Rs. 16,42,205 was capital expenditure. He added that the assessee under the agre....
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....centive in respect of allowability of lump sum payment made for acquisition of the technical know-how regardless of the fact that capital expenditure incurred on acquiring technical knowhow was earlier not allowable under section 37(1). He added that the intention of inserting section 35AB was certainly not to deny the benefit of deduction of entire amount of revenue expenditure incurred on technical know-how which was already allowable under section 37(1). In this connection, the learned Accountant Member referred to the decisions on interpretation of taxing statute in the case of Bajaj Tempo Ltd. He, therefore, agreed with the view taken by the Calcutta Bench of ITAT in Wellman Incandescent India Ltd's case in which it was held that the assessee's right to have deduction in respect of the payments made for obtaining the use of the technical know-how allowable as revenue expenditure under section 37 remained unaffected by the section 35AB introduced with effect from assessment year 1986-87. Section 35AB is enabling section and not disabling or prohibiting one and, therefore, it should be held to be applicable to that consideration made for acquiring technical know-how, which would....
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....ns in Ciba of India Ltd's case, Alembic Chemical Works Co. Ltd.'s case, Scientific Engg. House (P.) Ltd.'s case and Jonas Woodhead & Sons (India) Ltd.'s case. That agreement did not have any significant difference with the present agreement. The only new common thing in assessment year 1986-87 which was not present in assessment year 1984-85 is section 35AB, which was inserted with effect from assessment year 1986-87. However, since it had already been held by the learned Accountant as above, that section 35AB did not adversely affect the allowability of revenue expenditure on technical know-how under section 37(1), even the presence of section 35AB in assessment year 1984-85 would have made no difference. 11. The learned Accountant Member also duly examined the various clauses of the agreement between the assessee and Goodyear Tyre & Rubber Co., USA and then held that the assessee did not acquire ownership right but it only obtained right to use the technical know-how for manufacturing radial tyres, which was meant for improvisation of existing products of tyre manufactured by the Goodyear. The agreement only provided a licence to the assessee to use the technical know-how for ....
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....n dictionaries and in the context of the provision of the agreement and then held that the assessee had acquired ownership right of the technical know-how. He observed that the assessee was not required to return the technical datas, drawings, etc. after 8 years and infact the assessee continued to use the same even after expiry of 8 years and it had not returned the same. Thus condition (ii) above was also fulfilled in the case. He further held that since the assessee had paid part of the consideration for acquiring technical know-how in the year under consideration the last requirement, i.e., condition (iii) above was also fulfilled in the case. He, therefore, held that the expenditure in question squarely fell within the purview of section 35AB of the Act. 15. The Learned Judicial Member also examined section 37(1) and observed that the words in backet "[not being expenditure of the nature prescribed in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee]" were significant because sections 30 to 36 have been excluded from section 37(1) which is treated as residuary section. Considering the above, and decisions in High Land....
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....w for the manufacture of radial passenger tyres (Ref. Art.2), (iii) the agreement was for a period of 8 years and could be terminated at any time by a written notice in the event of any default by the concerned parties and on termination of the agreement, all rights and licences granted to the assessee shall be terminated (Ref. art. 6); (iv) in the event of any future discovery whether patentable, patented or unpatentable, relating to the processing methods, formula, or an improvement thereof by the assessee shall vest with Goodyear, USA and cannot be assigned or otherwise parted with without prior consent of Goodyear (USA) (Ref. art. 8); any right or interest in the agreement was intended to benefit exclusively the assessee and could not be assigned by either party without prior consent of the other party. (Ref. art. 13); (vi) during the continuance of the agreement and for additional period of seven years thereafter the technical data made available by Goodyear (USA) was to be held in confidence and could not be divulged without written consent to any person. (Ref. art. 7). 18. The learned authorised representative of the assessee further submitted that the technical know-h....
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....assessee further submitted that section 35AB of the Act provided for amortisation of lump sum consideration paid for acquiring any know-how for use for the purpose of the assessee's business. The said section does not cover a case where there is no right to use the technical know-how without any acquisition of the same. He added that the term "acquiring" mentioned in section 35AB refers to absolute proprietary rights in know-how as opposed to obtaining mere right to use. He then explained the meaning of the word "acquire" as given in the Shorter Oxford Dictionary and the Black's Law dictionary, and the meaning of the word "acquisition" as given in Bouvier's Law Dictionary (Third Edition) at page 114. The Law Lexicon Dictionary (2nd edition) and contended that the meaning of the word "acquire" and "acquisition" as given in the aforesaid dictionaries clearly showed that it referred to acquisition of proprietary/ownership right and not right to use only. 21. The learned authorised representatives then referred to the Supreme Court's decisions in the case of Charanjit Lal v. Union of India AIR 1951 SC 41 and submitted that the meaning of "acquisition" as given by the Supreme Court i....
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....ontended that even if the expenditure on obtaining right to use the technical know-how was allowable as deduction under both the provisions of the Act the deduction more beneficial to the assessee should be allowed in the case. Reliance was placed on Supreme Court's decision in the case of Indian Engg. & Commercial Corpn. (P.) Ltd. and Continental Construction Ltd. 25. The learned authorised representative of the assessee further submitted that the decision of the Supreme Court in the case of Jonas Woodhead & Sons (India) Ltd relied upon by the revenue is distinguishable on facts. In the present assessee's case the agreement provided for a limited right to use of know-how and licence to manufacture radial passenger tyres for 8 years. But in the case of Jonas Woodhead & Sons (India) Ltd. on the facts of that case 25 per cent of the expenditure in obtaining the technical know-how was held by the Supreme Court to be capital in nature in view of the finding of the High Court that under the agreement what was set up by the assessee was a new business and the foreign firm had not only furnished information and technical know-how but rendered valuable services in setting up of the fact....
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....learned Judicial Member. He submitted that two issues were to be decided in this case. Firstly, whether the payment in question was of capital nature or revenue nature and secondly if it was revenue expenditure, then, whether it was hit by the provisions of section 35AB. In support of his stand, that the expenditure in question was a capital expenditure and not revenue expenditure, the learned Sr. D.R. placed reliance on Supreme Court's decisions in the case of Southern Switchgear Ltd. v. CIT [1998] 232 ITR 359 and Jonas Woodhead & Sons (India) Ltd. He submitted that the nature of the technical assistance to be provided by Goodyear (USA) was not mere chemical composition but it included transferring technical data, technical development, plans, specifications, designs, secret manufacturing process, etc. In this connection, he referred to Article 3 and Article 1 of the agreement for technical assistance. He, therefore, argued that the assessee had acquired valuable capital asset under the said agreement and as such the consideration paid for the same was capital expenditure. 30. The learned Sr. D.R. then referred to article of the agreement and pointed out that the payments for t....
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....nditure was covered under section 35AB, it was excluded from the purview of section 37(1). He, therefore, added that the expenditure in question was not allowable under section 37(1) because the same was covered under section 35AB. He further added that the conditions required under section 35AB were all fulfilled in the case as had been discussed at length in the dissenting note of the learned Judicial Member. 33. The learned Sr. D.R. further submitted that the CBDT Circular No. 56, dated 19-3-1971 regarding the provisions of section 35AB, referred to by the learned authorised representative of the assessee, was not relevant in the present case because the issue here was different and not the same as under the provisions of section 35D. He also submitted that the reference by the learned authorised representative of the assessee to various decided cases relating to Explanation 2 to section 9(1)(vi) was not relevant because in those cases the issue was taxability in the hands of foreign company and not allowability of expenses as it is in the present case. 34. The learned Sr. D.R. further submitted that the submission of the learned authorised representative that in the alter....
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....ment year in question. 37. The learned authorised representative of the assessee in reply to the submissions of the learned Sr. D.R. submitted that the claim of the total lump sum amount in the assessment year in question was proper and justified and the learned Sr. D.R.'s contention that in the alternative the same should be allowed in 8 years or three years in accordance with the aforesaid provisions of the agreement, was not correct. He argued that the entire lump sum amount had become accrued in view of the agreement. He further submitted that this point raised by the learned Sr. D.R. was beyond the question referred for decision by the Third Member and, therefore, the same could not be considered by Third Member. 38. I have gone through the proposed order of the learned Accountant Member, the dissenting note of the learned Judicial Member and the materials on the file. I have also carefully considered the submissions and contentions of the rival parties. In order to answer the question referred to for my opinion as Third Member the following issues have to be considered and decided in the case, namely:-- (i) whether the said expenditure was a revenue or capital expend....
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....odyear." "Article 3 - Technical Assistance During the term hereof, Goodyear will furnish to Goodyear-India, upon request, such Technical Data as Goodyear-India may reasonably require in connection with the development, manufacture, use, maintenance, operation, testing and improvement of the Covered Products." 40. The above articles also show that the agreement was not for transfer of fixed technical data, plans, designs, etc. on the date of agreement but, the agreement was for providing such data, plans, designs, etc., which at any time during the term thereof are owned by Goodyear on a continuing basis which the assessee may reasonably require in connection with the development, manufacture, use, maintenance, operation, testing and improvement of the covered products." 41. Articles 6.1, 6.2 and 6.3 provide as under:-- "Article 6 - Duration and Termination of this Agreement 6.1 Unless sooner terminated by mutual agreement of the parties or as hereinafter provided, this agreement shall be in effect for a period of eight (8) years from the date the agreement is taken on record. 6.2 Goodyear shall have the right, at its option, to terminate this agreement at any t....
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....ed to the assessee continued o remain the property of Goodyear, USA and they were not sold to the assessee. Thus, from the perusal and construction of the terms of the agreement, it is clear that the assessee had not acquired ownership rights over the technical datas, plans, designs, etc. obtained fromGoodyear,USAand the right that it had acquired under the agreement was confined to their use for manufacturing of radial tyres for the fixed terms. In view of the above discussions, I hold that it was not a case of sale of the technical know-how byGoodyear,USAto the assessee but it was a case of transfer for use under the licence and thus, the assessee had not acquired ownership of the said technology. 45. The next aspect of the first issue, i.e., whether the expenditure in question was a revenue or capital expenditure, is whether the technical know-how was obtained for manufacturing a new product. In this connection, it is to be noted that the assessee had already been manufacturing tyres and that in assessment year 1984-85 the Tribunal while holding the payment of technical know-how fee for manufacture of extra large OTR tyres as revenue expenditure, observed that the agreement w....
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.... decision in Empire Jute Co. Ltd.'s case makes this position very clear. Again in these days of fast changing world of technology the advantage under the agreement could not be considered as advantage of enduring nature. The following observations of Bombay High Court in Bajaj Tempo Ltd.'s case supports this view: "We are unable to accept that this proposition applies to the assessee's case. This is so, because we are unable to read the assessee's agreement with the German company as an agreement the predominant purpose of which was to render mere documentation service. As pointed in Kirloskar Pneumatic's case [1982] 136 ITR 746 (Bom.), it is not possible to scan a contract in bits and pieces to determine its nature, nor by referring to a particular clause. As we read the agreement of the assessee with the German company, the predominant object of the agreement was to render technical know-how to the assessee. In relation to the main purpose, one of the incidental objects was to transfer the designs, data sheets and such other technical documents. We are unable to accept the agreement of Mr. Jetley that the agreement in question, when read in its entirety, should be held to be a....
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....aracter. Further, since the payments were made to have access to the knowledge and information that was necessary to carry on and run the business from day to day, it was not of much significance whether the agreement was entered into at the time of the commencement of a business or in the course of a business which was already being carried on. If the collaboration agreement results in the absolute transfer of technical knowledge to the assessee, the assessee could be said to have acquired an asset or enduring advantage but where the payment is made only for obtaining access to information which does not become its own, the payments cannot be elevated to the status of payments of a capital nature." 48. The Hon'ble Supreme Court in the case of Alembic Chemicals Works Co. Ltd. inter alia held as under. The relevant extracts from the Head Note are reproduced hereunder:-- "(ii) That there was no material for the Tribunal to hold that the area of improvisation was not a part of the existing business or that the entire gamut of the existing manufacturing operations for the commercial production of penicillin in the appellant's existing plant had become obsolete or inappropriate in....
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....s of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of sufficient degree of durability appropriate to the context." 49. In the light of the above discussions, I endorse the view of the learned Accountant Member that the lump sum amount of Rs. 16,42,205 was a revenue expenditure. In para 16.10 the learned Accountant Member has given his final view about this, which I reproduce below with my endorsement: "16.10 In the present case, the assessee obtained right to use the technical know-how for manufacturing of Radial Tyres, which was meant for improvisation in the process and technology for manufacture of tyres. It was a part of the existing line of business. The Agreement provided the conditions as to non-transferability to others without the permission of the foreign company, it also contained clauses relating to confidentiality and secrecy of know-how, it contained prohibition for user of the know-how upon termination of the Agreement. It only provided a licence to the assessee to use such technical know-how for a limited period as provided in the Agreement. The reading of the Agreement as a whole in the light of the a....
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.... nature" in the above provisions which have been used in sections 35A and 35ABB give prima facie impression that the view of the learned Judicial member is correct but the issue is not that simple. The provisions of section 35AB have to be understood in the light of the scheme of the Income-tax Act and other relevant provisions. As rightly observed by the learned Accountant Member, that no non-obstante clause like "Notwithstanding contrary contained in any other provisions of the Act" or "Notwithstanding any thing contained in sub-section (1) of section 37" has been used in section 35AB which would mean that it does not override sub-section (1) of section 37, under which the revenue expenditure is allowable as deduction in full. Again, the learned Accountant Member rightly observed that section 35AB is an enabling as well as incentive section, which allows deduction of lump sum payment for technical know-how in six equal instalments, i.e., 1/6th for six years. How can it be said to be an enabling and incentive section, if it brings within its mischief a revenue expenditure also which is allowable in full in the relevant year under section 37(1) of the Act. Therefore, the interpreta....
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....ould result in defeating the very purpose of section 15C. Therefore, it becomes necessary to resort to a construction which is reasonable and purposive to make the provision meaningful. A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it. 54. The learned Accountant Member also very appropriately referred to the ITAT,Calcutta's Bench decision in the case of Wellman Incandescent India Ltd. It was held in this case that the assessee's right to have deduction in respect of payments made for obtaining the use of technical know-how allowable as revenue expenditure under section 37 remained unaffected by new section 35AB introduced with effect from assessment year 1986-87. Section 35AB is an enabling section and not disabling or prohibitive one and, therefore, it should be held to be applicable to that consideration paid for acquiring technical know-how, which would otherwise be disallowable as being of capital account.....
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....ed at length herein before. The learned Accountant Member referred to the judgment of the Supreme Court in the case of Indian Engg. & Commercial Corpn. (P.) Ltd. and Continental Construction Ltd. in support of his view. The following observations of the Supreme Court in the case of Continental Construction Ltd. quoted by the learned Accountant Member is reproduced below for the sake of emphasis and clarity on the point:-- "Originally, section 40(c) contained sub-clause (iii) dealing with expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to an employee. The expenditure on employees is now removed from section 40(c) and incorporated in section 40A(5). The two sections 40(c) and 40A(5) are, however, not mutually exclusive. In section 40(c), the proviso, for example, refers to a case where the director (or a person who has a substantial interest in the company or a relative of the director or of such person) is also an employee of the company for any period prescribed in the previous year. In that situation, expenditure of the nature referred to in clauses (i), (ii), (iii) and (iv) of the second proviso to clause (a) of secti....
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....assessment year 1986-87. In this connection, I have considered the rival submissions before me including the rival contentions on whether this new point can be considered by a Third Member. I am of the considered opinion that as this point is important and arising from the materials on record, and as the Tribunal is a final fact-finding authority, it cannot be overlooked. The interest of justice and fair play demands that when a fact had come to notice before conclusion of a case, it must be duly considered and appropriately decided. 60. Let me examine the point with reference to the terms of the agreement and the provisions of the Income-tax Act. Article 4.1(a) is the relevant article regarding payment of the lump sum consideration in question. It provides as under: "Article 4--Payments 4.1 In consideration for the costs and expenses incurred by Goodyear to prepare and provide Technical Data to GoodyearIndiaon a continuing basis, Goodyear-India agrees to pay Goodyear the following payments during the term of this Agreement: (a) A lump sum amounting to Ninety-six thousand United States Dollars (US $ 96,000) subject to applicable Indian taxes. Such tax liability shall be....